The US dollar wants to show who is the leader by regaining its former dominant position. Its attempts to strengthen are quite successful, but the euro does not give up and tries to push the leading currency on the side.
Many analysts believe that the US dollar's further growth will require a boost from the Fed, particularly its actions aimed at normalizing the monetary policy and containing inflation. According to preliminary calculations, the "dominance" of the USD will last within 3-6 months. Reuters believes that a fundamental change in market expectations regarding the Fed's rate hike is needed to give the US currency a rapid increase.
Some experts admit that tightening the Fed's monetary policy will slightly change the situation. However, they also believe that the regulator was late in tightening the monetary policy and a series of rate hikes will not give the desired result. Experts are wondering whether the Fed will stop the unwinding of the inflationary spiral, and come to the conclusion that it is extremely difficult to do this. The regulator will have to maintain stable market expectations without provoking a recession. The Fed is being indecisive, which can collapse at any moment and pull the US dollar with it.
The US dollar's relative strengthening was facilitated by a decline in risk appetite in world markets. In this situation, the EUR/USD pair rose to the psychologically important level of 1.1300 but later slowed down this movement. On Thursday morning, the pair rose again to a round level. In the short-term planning range, experts expect the EUR/USD pair to break through the level of 1.1340, that is, the upper limit of the wide range of 1.1200-1.1350.
Analysts said that traders should foresee the possibility of a strong decline in the USD and develop a strategy for this case. According to current calculations, as long as the EUR/USD pair is below the level of 1.1500, the US currency remains valid. According to experts, the pair will reach this level by the end of February. But if this scenario is implemented right away, the EUR/USD pair will rise to 1.1500 by the end of this week. Such a development of events will 100% correct the fall of the pair recorded in the second half of January. In view of this, the EUR/USD pair will stabilize in the range of 1.1350–1.1500 in the coming weeks.
Like the American one, the euro is trying to gain dominance before the ECB meeting. The euro rose for the third day in a row on Wednesday, breaking a 20-month low. The reason for this is the off-scale inflation in the eurozone, the strengthening of which contributes to the expectation of an early rise in rates from the ECB. At the end of January 2022, the EU's consumer prices soared by 5.1% year-on-year. According to the calculations of Eurostat, this is a record figure in history, which is more than twice the target 2%. It can be recalled that in December 2021, the inflation rate in the eurozone was also extremely high (5%). In January, the cost of energy in the EU surged by an impressive 28.6% from 25.9% in December. Industrial goods also rose by 2.3%.
By the end of this week, the euro strengthened by 0.45% against the US dollar, reaching a nine-day high. The reason is the high probability of a faster tightening of the monetary policy by the European regulator following the meeting today. According to market participants, consistent high inflation will force the ECB to raise interest rates several times. Experts expect at least two rate hikes in 2022.
According to currency strategists at Scotiabank, if the ECB stays true to its principles and does not raise rates during the year, this will slow down the euro. Currently, the US and European currencies are in standby mode. The EUR/USD pair is actively looking for a way out and along the way, they are strengthening their positions, using the current gains as a reason to further rise.
